People want to own that debt. Banks, building societies, pension funds, life assurance companies, foreign governments, individuals even, all appreciate owning this debt because it’s the safest form of saving available in the UK in sterling. UK debt’s great stuff that people want.
Stage 1 QE started in 2009 and was last used in 2016. It created £445bn of new money. That was used to buy £435bn of government bonds, or gilts, and £10bn of corporate bonds, which we can ignore. There were three goals to first stage QE.
The first was to keep interest rates down. The Bank of England calls QE monetary policy for a reason. Buying gilts in the financial markets pushes up their price. And since the return paid on them is fixed if their price goes up the effective interest rate paid on them goes down.
So, err, people don’t want quite as many gilts as the Bank wants to issue then? That’s why they have to buy them to lower interest rates?
Then there’s the biggie here.
Snippa spends a long time telling us that QE! and QE2 haven’t bled into the real economy. They’ve just been spent on increasing reserves at the central bank and had the effect of raising asset prices. There is no real economy – other than asset – price inflation as a result. Well, maybe.
What should the government do? Stage 3 QE is my answer. This is quite different to stages 1 and 2. In stages 1 and 2 there’s no direct link between government spending and QE. It’s indirect. Spend creates the deficit, requiring bonds to clear it, which requires QE to cancel them.
In Stage 3 QE the link to spending is explicit. In this stage the government plans economic recovery. Call it a Green New Deal. A Green or National Investment Bank funds this programme. It issues bonds to pay for the investment. The Bank of England uses QE to but those bonds.
Now QE is explicitly created in advance to fund spending.
So if we do something completely different, create money to go spend in the real economy, the result will be the same – no inflation.
That might not be quite the way it works out really.